TN 14 (04-92)

A. Definition

Like any other corporation, an S corporation is separate and distinct from its shareholders. The basic difference from other corporations is it does not pay Federal corporate income tax. Income is passed directly to the shareholders for Federal income tax purposes. The corporation is carrying on any trade or business. The shareholders are not self-employed nor is their income NESE.

B. Policy - Coverage

The income from an S corporation may take three forms:

• Wages, received by shareholders as employees of the corporation,

• SEI, for fees paid to a corporate director,

• Dividends, paid to shareholders.

See RS 02101.016 - Officer or Director of a Corporation for information on the employee status of an officer or director of a corporation.

C. Procedure

Do not question the classification of income unless improper reporting is apparent; e.g., all income is reported as SEI one year and dividends the next.

D. Policy Health Insurance Deduction

Special rules for health insurance tax deductions apply through 6/30/92 for self-employed individuals and S corporation shareholders.

1. Self-Employed

Self-employed individuals may continue to claim deductions on their tax returns for health insurance through 6/30/92. This extends the right to claim deductions which were to terminate 12/31/91.

2. Subchapter S

Subchapter S shareholders may claim health insurance deductions in the same manner as self- employed individuals for the period 1/1/90 through 6/30/92.

This deduction was previously available only to self-employed individuals.